A Silver Lining for Europe Amid the Uncertainty

Andrei Knight, Sr. Currency Strategist, fxKnight.com
Markets for the most part have been bearish on the Euro following a failure to reach any meaningful agreement at Friday’s EU summit, but this may not necessarily be all bad for the future of the fledgling Union. I may be an optimist, but I’m not quite ready to call the end of the EU nor of the Euro as a currency.
While the so-called Eurobond, may have indeed provided an easy out, it would have also encouraged more of the same bad behavior which got so many of the European members into this mess in the first place. Austerity measures and budget cuts, while painful and unpopular in the short-term, are really the only meaningful long-term solution. Without being able to issue Eurobonds, EU leaders will have no choice but to confront the tougher issues.
Also rejected was the idea of changing the EU treaty. While this may be disappointing at first, consider that such changes require unanimous outcomes to 27 separate public referendums, and I cannot help but think of Ireland and the Lisbon treaty the last time this was attempted. Budgetary measures can also enforce tight controls, but without the need to take the vote to the public.
And the falling Euro? This may actually be a blessing in disguise. A cheaper currency means cheaper exports, and most importers are facing recessions of their own. Had the Euro remained strong while the Dollar and other currencies weakened, Europe might be facing the same sorts of issues as Switzerland and Japan, who have both had to intervene in order to devalue their own currencies. The primary difference being that if the EU cannot raise enough money internally to bail out its own members, where would it find the cash for a currency intervention?
So what’s ahead for the EUR/USD?
Certainly much will depend on the fortunes and future interest rate yields of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain), but we can also watch a few key technical levels for clues. Provided 1.3299 continues to hold as resistance, we will look for a re-test of the 1.3213 level next.
From here, we will either bounce up, forming a double-bottom, or break 1.3213 and establish it as our new resistance. In a bounce scenario, the next upside targets would be 1.3363, then 1.3435 and perhaps eventually 1.3607. In a break and re-test scenario, the next downside target is at 1.2969.

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